The 3-step retirement check-up
A market dip in the years before retirement can be scary, but bailing out of stocks isn't the answer. Here's how to make sure you're still on track.
Question: I am 61 and plan to retire in about eight months. Given the current market, do you think I should withdraw some or all of my 401(k) money and put it in a safe place that is covered by FDIC insurance? This is part of my retirement income. —Peggy Wagstaff, Marietta, Georgia
Answer: There’s no doubt that the older you are and the closer you are to retirement, the more frightening the current economic crisis is. After all, if you’re ready to retire or have already called it a career, you simply don’t have as much time to wait for stock prices – and your 401(k) account balance – to rebound.
If you’re drawing money from your retirement portfolio for income and your investments are dropping in value, the double-whammy of withdrawals and losses leaves you with less capital to participate in the market’s recovery, increasing the chances that you may run out of money later in retirement.
But moving your 401(k) stash and other retirement savings into safe options like CDs, a stable value fund or a money-market fund isn’t the right response.
What you really need to do is give yourself a more comprehensive retirement check-up that looks not just at your 401(k) investments but also helps you figure out what other moves you may need to make to assure a secure retirement down the road.
Here are three steps you can take to make that broader assessment.
Coolly review your investment strategy
Hunkering down in the security of conservative investments may be emotionally appealing. But unless you’ve got a huge nest egg, the yields you’ll earn on such options are just too low to provide adequate income and maintain your purchasing power in the face of inflation over a retirement that could easily last 30 or more years.
So while the stock market may be the last place you want to put any of your retirement money right now, the fact is that you still need the long-term growth that equities have historically provided. The key is to get that growth without being pummeled too badly during market downturns.
One reason so many pre-retirees are hurting so badly now is that they went into this crisis with far too much of their retirement savings in stocks. In recent testimony [www.ebri.org] before Congress, Employee Benefit Research Institute research director Jack Vanderhei noted that nearly four out of 10Â 401(k) participants in their mid-50s to mid-60s had 80% or more of their account invested in stocks in 2006.
Hey, I’m an optimist when it comes to the long-term outlook for stocks. But unless you’re holding a big cache of cash or bonds in some other account, having 80% or more of your 401(k) in equities is just way too aggressive for someone already retired or nearing retirement.
Reasonable people can disagree about what the exact blend of stocks and bonds should be, but for anyone on the verge of retiring or already in the early stages of retirement, something in the neighborhood of 55% stocks and 45% bonds is more appropriate. As you age, you should cut back your stock holdings even more, until you’re down to 20% to 30% in equities by the time you’re in your 80s.
Determine whether your planned retirement date still makes sense
The key question you must answer here: Given your 401(k)’s current value, can you still draw enough from your account to live comfortably over the next 30 or more years without running out of money before you run out of time?
The only real way to know is to crunch the numbers. You must figure out how much income you’ll need to live comfortably in retirement and then see if you can realistically expect to generate that amount from Social Security, any pensions you may have plus what you can safely draw from your 401(k) and other retirement accounts.
Any decent financial planner should be able to help you with this sort of analysis. You can also do it on your own by going to an online tool like the Retirement Income Calculator in the Investment Guidance and Tools section of T. Rowe Price’s site.
Originally designed for people who were already in retirement, this tool has been re-tooled, so to speak, so that you can also use it if you’re still in the pre-retirement stage.
Plot a course of action
If you’ll have enough coming in to cover your living expenses, great. You can stick to your scheduled retirement date.
But if you’re coming up short – and I suspect many people will, given the toll the market’s decline has taken on retirement accounts – then you’ll have to make some changes.
One option might be to retire on schedule but work part-time in retirement. Or you might decide to work a couple of more years. That would not only allow you to accumulate a couple extra years of saving, it would also give your portfolio a chance to recover.
And there’s another advantage to working a few more years: a bigger Social Security check. Each year you delay taking benefits beyond age 62, you get "delayed retirement credits" that can boost your monthly check by about 8% for each year you postpone up to age 70. Your Social Security check might go up even more because the extra accumulated wages can increase your benefit. You can see how much more you might receive by working a few extra years by going to Social Security’s new Retirement Estimator .
It’s crucial that you give yourself this sort of pre-retirement check-up before you leave a job that’s providing a good paycheck and decent health benefits. Otherwise, you may find yourself having to go back into the workforce where, as an older worker, you may have a hard time duplicating the pay and benefits package of your old employer.
Finally, whenever you eventually decide to retire, be sure to check in every year or two with a planner or calculator to assure that you’re not going through your retirement savings too quickly.
Starting with a modest initial withdrawal of around 4% of your retirement portfolio’s balance and then increasing that amount for inflation each year generally gives you about a 90% chance that your savings will last at least 30 years. But if your 401(k)’s value takes a big hit early in retirement and you don’t adjust your withdrawals, those odds can plummet.
So if you retire into a slumping market like this one, you may want to cut back your spending a bit so that your savings well doesn’t run dry late in retirement. After all, what could be more disconcerting than to realize that you’re in good enough shape to go another 10 or 20 years in retirement but your portfolio’s only healthy enough to make it another five?
I agree with Nancy 401k's are a joke. Equities simply cannot delivery the promised wealth and prosperity that Walter Updegrave and other talk about. If you look at the DJA or S&P 500 adjusted for inflation we're actually on a 12 year low and still dropping!!!
Why isn't anyone questioning the whole 401(K) and 403(K)situation? This was the greatest rip-off foisted on American workers. The only ones who benefit from this are the investment managers of the mutual funds, the businesses who don't have to contribute to a pension plan, and the shareholders of these companies. The old pension system worked fine. Everyone was guaranteed a definite income for his/her life. Now, the only people to benefit from our retirement portfolios, other than the ones mentioned above, are our heirs. Otherwise, we are making sure that the children of these managers can afford 50K+ tuition at private colleges.
Nancy NYC
The stock market I'm afraid is not coming back in your lifetime. Buy land…it's the only thing they can't produce on a printing press like the U.S.Dollar. Thanks! Uncle Sam!
Here is an Idea
Every hard working American pull all retirement money out of the market and see what is left. Let the Rich get poorer and find a job that requires you to work!
Typical advise from a fat cat…Advisor
Work longer live on less!!!!!!!!!!!!!!!!!!!!!!!!!
Ridiculous advice!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
To Dave, Boston:
If soon-to-be retirees are freaking out about their 401k losses now, I don't think it was by following Walter's advice in this article:
"having 80% or more of your 401(k) in equities is just way too aggressive for someone already retired or nearing retirement"
I think ALL reputable financial planners agree consistently that as your 401k matures and you get closer to retirement age, you should be continually transitioning to a more conservative portfolio. This "economic crisis" is proof that this is sound advice.
I don't plan to play craps with my nestegg when I get there and I certainly won't limit my retirement research to web articles on cnn, but the people in trouble now obviously didn't do their homework or follow sound financial advice.
It sounds more and more to me like people were sold on the fact that they should get a 401k and it would make up for the failed social security program and they just blindly contributed with out any further research or thought put into it.
A 401k isn't retirement insurance. Stocks and economies are always cyclical. Now is a good time to buy a house (not to sell one), now is a good time to buy stock (not to sell them).
My wife and I are in our 30s so we know we can't depend on social security and we probably won't ever be able to stop working fully (not sure I would want to; your brain stops working if you just play golf for the last of your years). we aren't made of money so we have already been tempered in the art of saving and living frugally.
When we "retire" we will try hard to have as diversified a portfolio as we can (land, property, house paid off, gold bullion, conservative 401k, pension, etc).
Peggy MUST withdraw her 401k by age 70, but she still has 9 years for the economy to turn right side up again. If she sells out of the stock market, someone will get a good deal on the stocks.
There sure is a lot of complaining going on. I don't remember reading all this jibber jabber when the market was going up. We were all pleased as punch at how much money we were accumulating.
My investment strategy has not changed. I continue to max out my 401k in stock funds…buying more shares at a discounted price.
We don't pay full price for other major purchases, do we? Why would anyone would want to pay higher prices for stocks? Now is a great time to buy stock funds. When they come roaring back (yes, it may take a few years), wealth will accumulate much faster because of all of the cheap shares accumulated when the market was down.
Just remember to begin moving your assets gradually into more conservative allocations as you approach 10 years before retirement.
The current market conditions offer learning opportunities on the importance of asset allocation and risk management.
Stocks have always gone up and down. Folks who are hurting right now probably had a risky asset allocation (too much stock) for their age and proximity to their desired retirement date.
Some folks want to work part-time when they retire to keep them active and engaged. I can't imagine spending my golden years watching the boob tube.
I may work during the colder months and take off the warmer months so I can be outdoors, take motorcycle trips, go camping,hiking and exploring.
If you don't have the money to retire then you don't have the money to retire. When it comes to planning for retirement there is no silver bullet. It's also a bit ignorant for people to start thinking about retirement when they are about to reach it. If retirement is suppose to be for at least 20-30 years, don't you think planning well in advance for how you can live a third of your life without actively earning an income is of the utmost importance? Shouldn't it take careful planning and nurturing throughout the years? Or does your retirement planning consist of waking up one day 2-3 years before you intend to retire and checking your account balances and then blaming the stock market for ruining your retirement?
It seems the next logical step that these people take is to finally ask for a bit of financial advice and then get angry over the harsh but realistic response that they may have to do one of three things:
1) Delay retirement
2) Work part-time
3) Cut back on their standard of living
At the end of the day it's never a sure thing. All the planning, investment of time, effort and money could lead to an unsuccessful retirement. But doing so will give you the best shot at achieving that comfortable retirement you've always dreamed about but never planned for.
With the current and for sometime to come market volitility it's been said that anyone in their mid 50's and older shouldn't have their retirement portfolio in stocks if you're going to need your money within a few years or so. If your money is still in stocks cut your losses along with working longer . At the time the market started going sour a year ago I gradually pulled out . I was conservatively diversified in my employers plan . I didn't suffer any losses to my portfolio because I had more going to savings ( stable value fund ) and maxing out my contributions for several years . If more investors who have an employer sponsored retirement plan took the time to educate themselves on how to use their employers plan and to their advantage their would probably be more retirement plans with less losses in this market . I've managed my portfolio on my own because I took the time educate myself rather than let someone else mess my money up. I will retire in less than 5 months with a 6 figure savings cushion . No one is going to watch and protect your money better than you yourself if you learn how.
No one is addressing people who are already retired and receive Social Security and are drawing an income from our IRA's or 401K's.
I am not so sure my financial advisor has my best interest in mind sometimes and now I have dropped to the point I can't sell and go to bonds or I lose all my shares when the market recovers.
And, now we know it has nothing to do with us, but greed from people who were supposed to be looking out for us. I think those people should have to reimburse us from the "golden parachute's" they received. Let them sell their fancy homes and boats; it isn't going to break my heart after what they have done to this economy – plus what the administration has done to us – this has been eight years of hell for the citizens of America. I hope I live to see them "get their's."
Articles like this are just insulting. Delay retirement? LOVE TO! All I need is a JOB to keep working at. As the economy continues to sink and jobs continue to disappear "forced retirement" will become all the rage. I guess the best thing will be just to put the olk folks off on an iceberg somewhere…
Here's a suggestion you may not hear too often, join the Peace Corps after you retire. You will spend two years in an undoubtedly exotic and rewarding situation being able to share your experience with others who truely need it, and your retirement monies will have two extra years to mature before being drawn upon. You will have an extra $6,000 ($12,000 if married and serving together) when you get out,and perhaps most importantly, you will have learned to greatly simplyfy your life as well as how to live on what you need rather than what you think is neccessary.
Actually I am required to take a minimum of 1/27 of whatever is in my account each year regardless of the monetary value, the share ratio still in there remains the same.
Most american families have two wage earners; if you & your spouse own your home & draw SS living quite comfortably should not be a problem. It looks really rough out there to me; I think it's time for "seniors" to get involved volunteering.
I don't think that Peggy's question was even answered. She wasn't questioning whether she had enough to retire, but rather if it was safe in a 401K versus an account covered by FDIC insurance.
Additionally, if you plan to be retired for 20 or 30 years, then you should have some money invested in long term investments… such as equities. The money that you plan to access in the next 5 years should be in money market accounts, because 5 years is a short term. That is why there is a suggested ratio of stocks, bonds and cash for someone close to retirement. Someone who has followed that very typical advice should not be worried because they have their next 5 years covered, their intermediate term investments are getting the best returns available currently and their long term investments (stocks) will have time to recover. The stock market has returned an average of 8% over any 10 year period, including the great depression. Someday, someone will make that pronouncement and include a reference to this market crisis.
The advice to work longer is included because most often, that's the only alternative. If someone has not saved enough by age 60-65 to withstand inevitable market drops, or had too much in stocks for their age, there's really no other options now. A magic money generator hasn't been invented yet. The only other possibility is to cut expenses enough to live on whatever you do have for the next few decades.
Retirement is not a right or an automatically occurring event. The concept didn't even exist until the 1940's after social security came along, and still doesn't for most of the world. To anyone under 40 reading this, that's why it's critically important to plan for worst case scenarios, including poor health, early in your working life. Unfortunately once you hit your late 50's and above, the options start to run out. That's true even in good times.
The half-baked advice of people like Walter Updegrave is the reason why millions of Americans are now being forced to rethink retirement.
The stock market is always the key to a great retirement. Except when it isn't. And when that happens…tough luck, keep working 'til you die.
Remember, if people were invested less in stocks, Walter Updegrave would not have a job and cnnfn would no longer exist. Hens don't take advice from wolves.
Sorry to use this article to vent, but I am so tired of people being told to delay their retirement. Because of cancer and other health concerns, I had to retire at age 60 and was barely able to wait until 62 to start collecting Social Security. Every bit of advice that I've read on the subject assumes that the person planning retirement is able to postpone retirement until he/she feels like taking it. NOT SO! For a variety of reasons, just some of them physical, many folks really need to retire well before their 62nd birthday. The nonchalant advice to "work a few years longer" can only be offered by someone who is young and healthy, and totally unaware of the toll life takes on a good many working people well before they are eligible to collect Medicare. One of my friends, a long-time IRS employee, toughed it out in spite of mental misery and physical illness until he reached 65, and died just months later. I rest my case.
If she can live on an annual withdrawal of 4% of her current reduced 401(k), she is in pretty good shape. If she needs 4% of what was in her 401(k) last year, now is not the time to retire. What she shouldn't do is withdraw money from her 401(k) before retirement.
To Scott in San Jose – I am in full agreement that everyone has to earn the ability to retire and it is our own responsibility. I did read more than one line in this article. If I wasn't clear, the issue I have is when somebody is being given advice to keep working (part/full time whatever) just so you can still throw money into the market when you can take it out and know where it is. I think it comes down to your comfort level of what you are willing to possibly lose. But then again, I don't know everything nor claim to. Hell, that's obvious or would not be reading these articles.
Peggy, good luck.
What is different this time is that the millions of baby boomers are now reaching/have reached retirement age. The level of contribution to retirement vehicles will begin to drop and the withdrawls will accelerate… there is less time to make up for market reversals at the same time principle balances will be dropping. The baby boom generation has had the same boom/bust effect on all economic and social systems they have encountered. Nothing will change that fact.
This is a scary time to be in stocks and people need to know a little history to understand what is happening today and what could happen tomorrow.
"What many investors don't know is that the 1930s were also the most volatile decade on record for stock prices. Investors, their nerves rubbed raw by the Depression, were prone to fits of euphoria and despair.
Thus, the industrial average plunged 52.7% in 1931 and 32.8% in 1937, but it rose 66.7% in 1933 and 38.5% in 1935. Daily volatility was also intense. Strange as it may seem, seven of the 10 biggest up days in history, on a percentage basis, occurred during the 1930s." –Dow Jones & Co.
We are in a period that is very similar to October 1929. If we are heading into another 1930's slump, the 401(k)/mutual fund model for retirement is toast… gone the way of the leisure suit and the "investment bank".
Here come the nitpickers who only read one sentence of an article…
If people can't (or won't) work part-time, then they have to compute their retirement needs with a different variable. All Walter is doing is laying out the variables, how you use them is up to you. You can't expect individual retirement advise from a general service web-site.
"The point of retiring is to not work any longer." Remember, there is no right to retirement. You have to earn it.
with economic like this, whether can be employeed sometimes (or lot of times) is not controled by us, but rather by the employers. So many companies are not doing well and unemployment rate is going up and up, how can someone suggest us to "keep working" when there are fewer and fewer jobs avalaible, especial for those who are over 50???
It's not a choice between losing 20-30% vs. making 4-5%. That's an apples and oranges comparison, since the former looks backwards ("I'm down whatever percent in this market") while the latter looks forward ("I could take that money and make a sure thing in a savings account"). Apples and oranges–you can't know that your losses will continue in stocks, or, even if you argue that you can, you can't know how long they'll continue for. Moreover, the "sure thing" of a 4-5% return is a guaranteed loser in the future, since you ensure your money loses purchasing power due to inflation, which stocks historically haven't done. Sure, "this time is different"–just like all the other "different times" that weren't. So, stay in stocks, but at a level that makes sense for your age and proximity to retirement.
So, by this proposal, losing 20-30% of half your 401k is better than making 4-5% on all of it. The assumption of "running out of money" in retirement due to inflation is seriously flawed. Yes, things will cost more, but, nothing requires steady purchases, save for food, shelter and un-covered health services: hardly 100% of anyone's pre-retirement spending. Once you determine those things you will have to spend money on when retired, you will be be better prepared to decide what to to do in this catastrophe of a market. Blindly applying investment percentages to your nest egg without evaluating your spending habits and needs is a sucker's game.
I think Peggy should continue to work full-time until she can afford to retire. Numbers like 59 1/2, 65, and 67 don't mean much in reality. It is a balence between when you want to retire and when you can afford to.
What about people who don't have the option of working part-time or going back to work — for example, because bad health forced them to retire?
I find it irritating when an advisor suggests to keep working part-time. The point of retiring is to not work any longer. To continue working to balance out the probable loss in the market now is strange. Why not suggest Peggy take some of her money out now and not have to worry about a loss.
Let Peggy take the money and retire..
If the stock markets tank another 20-30% and it takes another 4-5 yrs to recover..who will Peggy blame?
Nancy NYC: Where do you think pensions come from? They come from contributions made on your behalf by your company and are invested in the stock market. Most of these pensions were overpromised and underfunded. It is unrealistic to ever again expect pensions to play a significant role in retirement (with the exception of public employees). The 401(k) and 403(k) are here to stay. Get used to it.